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I remember hearing a figure somewhere that went something like this. . .

"For every $100 bill you save and properly invest, you make X cents per month for the rest of your life. The trick is, saving and investing enough of those $100 bills to create a sustainable income."

Does anyone know what this figure may have been? I found it particularly inspiring.

If a source can't be found, does anyone know how to go about calculating it?

Aww_Geez
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    Most of the answers here are completely fanciful, because they ignore inflation. (Of course some "financial advisors" also ignore it to sell you a product with a "look at this huge sum of money you will have in 25 years" story). For those who haven't lived beyond the current anomalous low-inflation period, take note of some numbers from when I was starting my career, in the UK. My university fees for food and lodging: £5 per week. My first full-time wages: £10 per week. But the price of beer back then was £0.10 per pint, so £10 went a long way! – alephzero Jun 20 '20 at 03:01
  • ... and house prices were similar. At that time, my parents bought a plot of land and had a house designed and built on it. The total cost - about £3,500. (That isn't a typo - it cost £3,500, not £350,000). Now think again about what $100 will be worth, when you retire. Probably not enough to buy a Big Mac, if they are still being sold! – alephzero Jun 20 '20 at 03:04
  • @alephzero: Since we don't have any idea what inflation will be in the future, the ony way to get a sensible answer is to ignore it, and use inflation-adjusted rates of return. IOW, if your investment currently returns 10% per year but inflation is 3%, run your calculations using 7%. (And just for interest, what was the cost of a personal computer back then? Or a telephone call?) – jamesqf Jun 20 '20 at 05:08
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    @alephzero but Mr. Bingley and his great estate at Netherfield was only £20,000. If there's anything I've learned from watching PBS, it's that a pound sterling is worth a lot! – Harper - Reinstate Monica Jun 20 '20 at 06:03

5 Answers5

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Assume some sort of annual interest rate Ry compounded monthly. The monthly interest rate is then

Rm = 100 * [(1 + Ry/100) ^ (1/12) - 1]

Here's a table of a few Ry and corresponding Rm, assuming monthly compounding:

   Ry      Rm
 2.5%  0.206%
 5.0%  0.407%
 7.5%  0.604%
10.0%  0.797%

If you invest $100 and keep it invested at a constant monthly interest rate and you take the interest out and don't reinvest, that $100 will earn $100 * Rm perpetually. So...

   Ry      Rm    Monthly Income from $100
 2.5%  0.206%                      ~$0.20
 5.0%  0.407%                      ~$0.40
 7.5%  0.604%                      ~$0.60
10.0%  0.797%                      ~$0.80

I think over the long term that equity markets have done in the 7.5% to 10.0% range, so $0.60 to $0.80 per $100 per month invested is probably in the right ballpark.

Also note that this leaves the $100 perpetually invested. If you wanted to "draw down" that $100 over some defined period of time, you could increase the monthly income somewhat and end the period with $0 invested. This is how paying mortgages works, but in reverse.

Patrick87
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  • I believe the article I remember framed it similarly to this-- It mentioned that the $.60-$.80 you gain in income makes your next $100 bill saved come sooner. Mathematically it's not optimal to do, but it helped me to think of it that way. – Aww_Geez Jun 19 '20 at 16:16
  • @Aww_Geez Yes, what the article is suggesting then is basically reinvesting the interest/dividends rather than pulling them out. If you do that, your next $100 will come more quickly. Assume you work for a living and perpetually have $100 available after expenses to invest each month. The first month you have $100. The second month you have $100.70. The third month you have $101.40. Etc. Eventually you'll have enough to do $200/mo. The growth is exponential and eventually your investments will dwarf your earned income (under simple mathematical assumptions). – Patrick87 Jun 19 '20 at 16:20
  • @Patrick87 or if you have $10 a month extra, after 10 months you have $100, but then it only takes 9.5 months, and then 9 months and so on. – Tim Jun 20 '20 at 14:43
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I can't find that particular source, but I'll give you my take.

One thing to remember is that most investments compound, meaning if you save $100 today, you don't just make a flat X forever, the X actually grows as you earn interest on interest earned.

Now, how much X is depends on what you invest in. And what you invest is is a tradeoff of risk and reward. Not risk in the sense of losing it all, but in the sense of how much X fluctuates (or how much you can lose in a period). The higher the risk, the higher the reward.

So let's look at a very safe 2% savings account. If you save $100 today, in one month you'll earn 100 * 0.02 / 12 = 0.17. The next month you'll earn 100.17 * 0.02 / 12 = 0.17 again. So you don't see the effects of compounding at 2% unless you start with a large amount or let it sit for a long time. So let's look at 10 years. In 10 years, compounded at 2% APR monthly, you'll have 100 * (1+.02/12)^120 = 122, for an average growth of 18 cents a month.

Not blowing your socks off, huh?

So let's look at a more risky investment. Say instead of putting it in a savings account, you invested in an S&P 500 ETF that on average grows at 10% after reinvesting dividends. You won't lose your entire savings, but you may have months where you go down 10% and months where you go up 20%. But, on average, you earn 10% annualized.

Now, after 10 years, you'll have 100 * (1+.10/12)^120 = 271 for an average monthly gain of 1.42 (the gains are not linear, though, you start off with small gains that grow as your balance grows). You've nearly tripled your money versus a total gain of only 22% in ten years. So adding risk to your savings can make a tremendous impact on your growth.

Still not blown away? The next improvement is not to save $100 once, but to save $100 every month. So now let's say you save $100 per month in a 2% savings account for 10 years. Your end total (the math is too complex to show a formula, but you can find calculators online) would be 13,271 (with 12,000 of that being your contributions).

So that seems better, right? Now look at saving $100 in the S&P ETF with a 10% return. After 10 years, your balance would be 20,484 (with 12,000 being your contribution).

So the trick is not to find the absolute best return or to try and time the market, but to save consistently for a long time. That is where wealth is built.

D Stanley
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When talking about living off of passive investment income, people usually talk about a Safe Withdrawal Rate. Depending on context, this usually means the rate at which you can draw money from your investments without ever drawing them down to zero (or without ever going below your starting balance, or so that your money will last you X years before running out). Usually this number is in the 3-7% range per year, and is based on assuming investment returns based on long-term historical averages. This isn't necessarily predictive of future performance, and any short-term variance can change the numbers significantly.

Assuming a withdrawal rate in that range, each $100 will yield between $3 and 7$ per year, or between 25 and 60 cents per month.

yoozer8
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  • I think this misses the potential of compound interest (which is arguably one of the most important factors in long-term investing and personal finance as a whole). If you invest $100 now and don't touch that money for a few years, you'd have a lot more than the $100 you initially invested and you'd be making a lot more than $3-7 per year for that initial $100. – NotThatGuy Jun 20 '20 at 21:32
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    Doesn't miss it, just kind of ignores it. Each $100 can be expected to yield around that much (on average, depending on investment returns), regardless of whether that $100 came from your pocket or from earlier investment returns – yoozer8 Jun 20 '20 at 21:42
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Endowment manager here. An endowment is a large block of money/capital which is invested to be a "forever fund". The growth of the fund partly hedges against inflation and partly funds things like college chairs, sports teams, etc.

An endowment is a real-world exercise of exactly what you are talking about. So let's look at how the numbers really work.

Stocks move up and down. A short investor calls that "risk". A long investor calls it "volatility". It's widely known that the investments with the highest long-term growth also have the highest volatility. An endowment manager just doesn't care about the volatility on a "forever fund". So endowments are very heavily loaded into the stock markets, with a small amount of diversification into bonds, real estate etc. just to keep the Board of Directors happy. What does this do for performance?

A drawdown rate of 4-7% a year is considered prudent, meaning endowment managers really don't need to justify themselves to investigators if that's what they are doing. 7% may be a bit high; you run the risk of not keeping up with inflation. But that gives you an idea.

Based on endowment math, $100 invested yields $4-7 a year or 33-58 cents a month.

Harper - Reinstate Monica
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Depends on the definition of 'properly invest'; if you assume earning interest on a risk free asset, you would earn 1-2% of that $100 every year, so about $0.10-$0.25 a month. If you assume earning about 7% in a riskier stock portfolio, that could go up to ~$0.75 per month.

Of course, if you earn $100 at 20 years old, and invest it for the next 45 years until retirement, that $100 in an average 7% risky equity portfolio, then in 45 years it would be worth $100 x (1 + .07) ^ 45 = $2,100. This is far higher than just $7 / year * 45 (which would be about $300 earned), because your earnings today will be invested and earn more next year. This is called 'compounding'. The point is that the earlier you invest, the larger the ultimate earnings on that investment.

So if you want to look at it (backwardly) that you will eventually have $2,100 in 45 years, then $2,100 / 45 / 12 months = ~$3.8 earned every month on that $100, if you leave it for 45 years.

If you want to take it a step further, and say how much will you get out of that $2,100 after retirement, assuming you withdraw 4% every year [because you want the ~7% earnings to cover up for the withdrawals you make], you could withdraw ~$80 / every year, or about $7 every month, forever.

Grade 'Eh' Bacon
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